Continuous Quotation System – Definition

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Continuous Quotation System Definition

A continuous quotation system is defined as a securities trading system which when orders are placed, creates room for transactions and market makers. Securities are investment instruments that provide evidence of debt or equity other than the insurance policy or fixed annuities issued by a company, the government or other entities. Market makers are brokerage or financial institutions that maintain an offer to the firm and request prices at a certain location, prepared to buy or sell at publicly quoted rates (called market making).

Individual shares liquidity which can be used for a majority of exchanges globally is provided by this system.

A Little More on Continuous Quotation System and other Trading Mechanisms

Irrespective of the market type, the detailed organization and implementation behind assets and securities trading can be referred to as “trading mechanisms”. The various market types could range from exchanges or dealers to OTC markets. The process of connecting buyers and sellers of an asset are all part of the mechanism. Although there are several types of trading mechanisms, there are two primary types of trading mechanisms namely:

  • Order driven markets
  • Quote driven markets

The device or database behind a trading process powered through an order book is the order book. This book lists all purchasers and sellers and their expected offers and demands.

Trading Mechanisms: Quote Driven

Continuous prices which have been provided by the market makers are always given to buyers and sellers that have been connected in a quote driven market. This implies that OTC or dealer markets will be the most suited for this mechanism type. The price provided by the market makers is the price a dealer is willing to sell in the buyer’s perspective while the given price is the amount the dealer is buying from the seller’s perspective. All things being equal, the selling price will be higher than the specified buying price. The amount of profit made by the market maker and the dealer is known as the “spread”.

Trading Mechanisms: Order Driven

Buyers and sellers of assets will order products that they want to buy or sell in an order-driven market. The orders placed are immediately executed at the best price which is available once the assets have been listed at market price. If this method doesn’t want to be used, a fixed or limit price can be indicated so that a limit or stop order can be initiated, making sure certain conditions have been met before the market order is executed. Order driven trading mechanisms are best to be used for exchanges because in respect to the listed price, there is an unavailability of counterparties; and the orders will be executed immediately a buyer or seller finds a counterparty.

Disadvantages of the Order Driven market

It can be seen from the definition of the order-driven market mechanism that there will be lower liquidity in this mechanism style as compared to the quote driven market. In as much as the dealer is willing to accept the slightly raised premiums of a quoted price, the market maker will always be present to buy or sell in a quote driven market. When buyers are not ready to accept prices listed by sellers in an order-driven market, trade can stop abruptly, meanwhile, the unwillingness of buyers to accept quoted prices in a quote driven market doesn’t affect trade. Assets such as options, bonds etc which are naturally liquid and traded frequently are the best suited for order-driven markets because of its automated matching system.

Trading Mechanisms: Order Types

There are a majority of order types which can be taken advantage of by a trader when operating in an order-driven market. Trade orders refer to various types of orders placed on exchange for financial assets, for instance stocks or futures contracts. The order-driven trading style matches the order requirements for buyers and sellers. That is, a buyer with a purchase price that corresponds to a seller’s sales price corresponds to an executed transaction. The various types of trade orders allow traders to make their trade more flexible and unique. These are the most common forms of trade orders:

Trading Mechanisms: Order Timing

The timing of a trade order (Trade order timing) allows customers to determine the time that a trade order is suitable for. For instance, orders may remain forever until they are executed, only last a day, or last for a certain duration. The various types of time frames of the trade order have various advantages and disadvantages, alongside the various strategies that an investor may have or wish to use. The most common forms of trade order timing according to the time order in which they will execute are as follows:

  • Market Order (Immediate)
  • Fill or Kill
  • Good Today (otherwise referred to as Good Until Close of Day Order)
  • Good Until 
 Specified Time or Date
  • Good Until Cancelled (GTC)

References for Continuous Quotation

Academic Research on Continuous Quotation System

Development of computer-aided quotation system for manufacturing enterprises using axiomatic design, Chen, K. Z., Feng, X. A., & Zhang, B. B. (2003). Development of computer-aided quotation system for manufacturing enterprises using axiomatic design. International journal of production research, 41(1), 171-191. To survive in the competitive market environment, rapid and accurate quotations of product prices are needed in addition to satisfying consumers from various perspectives, including product quality and after-sale service. This paper develops a framework for a computer-aided quotation system using Axiomatic Design. The system has five functional modules, i.e. inquiry check, search and statistics, design for quotation, price determination, and tender generation. The result of Axiomatic Design for price determination shows that a very complicated software program becomes simple and consists of 14 modules corresponding to 14 calculations and one main module that contains all the junctional properties at each level. According to the framework developed, several computer-aided quotation systems have been developed and applied successfully. A computer-aided quotation system for modular machine tools and production lines consisting of them is introduced as an example.

Toward a national market system for US exchange–listed equity options, Battalio, R., Hatch, B., & Jennings, R. (2004). Toward a national market system for US exchange–listed equity options. The Journal of Finance, 59(2), 933-962. In its response to the 1975 Congressional mandate to implement a national market system for financial securities, the Securities and Exchange Commission (SEC) initially exempted the option market. Recent dramatic changes in the structure of the option market prompted the SEC to revisit this issue. We examine a sample of actively traded, multiply listed equity options to ask whether this market’s characteristics appear consistent with the goals of producing economically efficient transactions and facilitating “best execution.” We find marked changes between June 2000, when quotes are often ignored, and January 2002, when the market more closely resembles a national market.

Continuously adaptive continuous queries over streams, Madden, S., Shah, M., Hellerstein, J. M., & Raman, V. (2002, June). Continuously adaptive continuous queries over streams. In Proceedings of the 2002 ACM SIGMOD international conference on Management of data (pp. 49-60). ACM.

Disclosure in the corporate annual reports of Swedish companies, Cooke, T. E. (1989). Disclosure in the corporate annual reports of Swedish companies. Accounting and business research, 19(74), 113-124. Sweden is of interest because of the rapid growth in the Stockholm stock exchange and because of the country’s disproportionate number of multinational enterprises. This paper reports on the extent of disclosure in the corporate annual reports of Swedish companies. An assessment is made as to whether there is a significant association between a number of independent variables and the extent of disclosure.

Market structure and the intraday pattern of bid-ask spreads for NASDAQ securities, Chan, K. C., Christie, W. G., & Schultz, P. H. (1995). Market structure and the intraday pattern of bid-ask spreads for NASDAQ securities. Journal of Business, 35-60. This article examines the intraday pattern of bid-ask spreads among NASDAQ stocks. We find that spreads are relatively stable throughout the day but narrow significantly near the close. This contrasts with the U-shaped pattern for NYSE stocks reported by Brock and Kleidon and McInish and Wood. We attribute these divergent patterns to structural differences between specialist and dealer markets. The wider spreads for NYSE stocks near periods of market closure may reflect the market power of specialists. The decline in spreads near the close for NASDAQ stocks is consistent with inventory control by individual dealers.

Continuous‐time models, realized volatilities, and testable distributional implications for daily stock returns, Andersen, T. G., Bollerslev, T., Frederiksen, P., & Ørregaard Nielsen, M. (2010). Continuous‐time models, realized volatilities, and testable distributional implications for daily stock returns. Journal of Applied Econometrics, 25(2), 233-261. We provide an empirical framework for assessing the distributional properties of daily speculative returns within the context of the continuous‐time jump diffusion models traditionally used in asset pricing finance. Our approach builds directly on recently developed realized variation measures and non‐parametric jump detection statistics constructed from high‐frequency intra‐day data. A sequence of simple‐to‐implement moment‐based tests involving various transformations of the daily returns speak directly to the importance of different distributional features, and may serve as useful diagnostic tools in the specification of empirically more realistic continuous‐time asset pricing models. On applying the tests to the 30 individual stocks in the Dow Jones Industrial Average index, we find that it is important to allow for both time‐varying diffusive volatility, jumps, and leverage effects to satisfactorily describe the daily stock price dynamics. Copyright © 2009 John Wiley & Sons, Ltd.

Competition and the pricing of dealer service in the over-the-counter stock market, Tinic, S. M., & West, R. R. (1972). Competition and the pricing of dealer service in the over-the-counter stock market. Journal of Financial and Quantitative Analysis, 7(3), 1707-1727. The stock market is in the midst of an era of change unparalleled since the Great Depression, long-standing institutions — including the major stock exchanges — are being radically challenged by contemporary developments, and novel approaches to making markets for common stocks are appearing with increasing frequency. In addition, the Martin Report and the recent hearings of the Securities and Exchange Commission on the future structure of the equities market indicate that the regulatory climate surrounding the stock market can be expected to undergo serious change in the near future.

The quality of ECN and Nasdaq market maker quotes, Huang, R. D. (2002). The quality of ECN and Nasdaq market maker quotes. The Journal of Finance, 57(3), 1285-1319. This paper compares the quality of quotes submitted by electronic communication networks (ECNs) and by traditional market makers to the Nasdaq quote montage. An analysis of the most active Nasdaq stocks shows that ECNs not only post informative quotes, but also, compared to market makers, ECNs post quotes rapidly and are more often at the inside. Additionally, ECN quoted spreads are smaller than dealer quoted spreads. The evidence suggests that the proliferation of alternative trading venues, such as ECNs, may promote quote quality rather than fragmenting markets. Moreover, the results suggest that a more open book contributes to quote quality.

The dynamics of discrete bid and ask quotes, Hasbrouck, J. (1999). The dynamics of discrete bid and ask quotes. The Journal of finance, 54(6), 2109-2142. This paper presents an empirical microstructure model of bid and ask quotes that features discreteness, random costs of market making, and ARCH volatility effects. Applied to intraday quotes at 15-minute intervals for Alcoa (a randomly chosen Dow stock), the results show that quote exposure costs contain stochastic components that are persistent and large relative to the deterministic intraday “U” components. Analysis of the filtered estimates of the system suggest that bid and ask costs contain common components, and that these costs reflect risk as proxied by ARCH variance forecasts.

An analysis of equity markets of quotation systems, Duteil, G., & Mulugetta, A. (1994). An analysis of equity markets of quotation systems. In The Changing Environment of International Financial Markets (pp. 244-260). Palgrave Macmillan, London.

Public information releases, private information arrival and volatility in the foreign exchange market, DeGennaro, R. P., & Shrieves, R. E. (1997). Public information releases, private information arrival and volatility in the foreign exchange market. Journal of Empirical Finance, 4(4), 295-315. This paper estimates the impact of market activity and news on the volatility of returns in the exchange market for Japanese Yen and US dollars. We examine the effects of news on volatility before, during and after news arrival, using three categories of news. Market activity is proxied by quote arrival, separated into a predictable seasonal component and an unexpected component. Results indicate that both components of market activity, as well as news releases, affect volatility levels. We conclude that both private information and news effects are important determinants of exchange rate volatility. Our finding that unexpected quote arrival positively impacts foreign exchange rate volatility is consistent with the interpretation that unexpected quote arrival serves as a measure of informed trading. Corroborating this interpretation is regression analysis, which indicates that spreads increase in the surprise component of the quote arrival rate, but not in the expected component. The estimated impact of a unit increase in unexpected quote arrival and the range of values observed for this variable imply an important volatility conditioning role for informed trading.

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